May 20, 2013

New Law Review Article On Just Compensation: Property Owners Getting Too Much

Much of the interest in eminent domain law since Kelo v. New London understandably has been on the Public Use Clause, but as condemnation lawyers know, a supermajority of the issues in these cases involve the other part of the Takings Clause, the question of just compensation.

The shorthand usually employed is that an owner whose property is taken is entitled to "fair market value," but that is only part of the equation, since, as the Supreme Court has held, the Just Compensation Clause requires the "full and perfect equivalent" be provided when an owner of forced to give up property for the public good. See Monongahela Navigation Co. v. United States, 148 U.S. 312, 325 (1893).

When the government exercises its power of eminent domain to take private property, the Fifth Amendment to the U.S. Constitution requires that the property’s owners receive "just compensation," which the Supreme Court has defined as equal to the property’s fair market value. Today, a well-established consensus exists on three basic propositions about this fair market value standard. First, the standard systematically undercompensates owners of taken property, because market prices do not reflect owners’ personal valuations of particular pieces of property. Second, this undercompensation is unfair to those owners. And third, an appropriate way to rectify this problem is to add fixed-percentage bonuses to the amount of compensation paid. Several states have recently enacted laws requiring such bonuses, and prominent academics have endorsed their adoption. This Article, however, argues that all three of these widely accepted propositions are false. First, examining the economics of market price formation reveals that fair market value includes compensation for more subjective value than previously recognized. Second, much of what market value leaves uncompensated should not, in fairness, receive compensation. Third, although justice may require paying compensation above fair market value in certain situations, this Article argues that the solution favored by academics and recent state legislation is itself unjust, undermining the civic and moral equality of rich and poor property owners by relatively overcompensating the rich while undercompensating the poor for losses which have equal value to rich and poor alike. The Article concludes by showing how an alternative approach can avoid these fairness problems.

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